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The Monetary Policy Committee of the Central Bank of Nigeria held their regular meeting on November 22nd and 23rd. The key decisions were:
1. To Retain the Monetary policy Rate (MPR) at 6.25 per cent.
2. To adjust the corridor to +/- 200 basis points, implying Standing Lending Facility (SLF) rate of 8.25 per cent, and Standing Deposit Facility (SDF) rate of 4.25 per cent.
3. Maintain the policy stance of a stable exchange rate.
4. Continue to monitor inflationary trends with a view to taking appropriate steps as and when necessary.
5. On the stance of monetary policy in the year ahead, the Committee reaffirmed that monetary policy would seek to exert pressure on aggregate demand, thereby helping to lower inflation expectations.
The report is below:
Afrinvest released a report on the Nigerian Economy. It is more a scorecard of the Nigerian Economy so far for 2010. As usual, it is a very comprehensive review.
I must say, it is not comforting in any way. Here are some reasons for concern – Nigeria’s investment rating has been downgraded from Stable to Negative, there has a huge depletion of the foreign reserves, the government is still on a borrowing binge, and the Naira is reducing value. And dont forget the upcoming elections.
Some excerpts are below. But to get the full benefit, read the entire report.Afrinvest 2010 Nigerian Market Review (604)
<blockquote>On the macroeconomic front, an analysis of provisional data provided by the National Bureau of Statistic (NBS) indicates that real GDP grew by 7.7% in Q2 2010, up from the 7.4% recorded in Q1 2010. The CBN has revised the GDP estimates upwards, forecasting a 7.8% growth in GDP for 2010 (with growth estimates of 7.7% and 8.2% in Q3 and Q4 respectively). The upward review in GDP forecasts rides on the back of favourable rainfall (a critical input for agricultural produce), improved crude oil and natural gas production, and the relative stability in crude oil prices. The non-oil sector is expected to remain the key driver of overall growth. External reserves stood at $36.6bn as at mid September, compared to $37.2bn by the end of July 2010. This range is expected to hold, depending on the stability of oil prices and output.
Oil production has remained relatively stable around the 1.9–2.1mbpd range (year to date), following the return of stability to the Niger-Delta earlier in the year and the success of the on-going amnesty programme. Oil prices have however been volatile all through the year; it stood at $83.30 at the end of Q3 ’10, which is above the country’s benchmark oil price of $60.00. We re-iterate our belief that oil prices will hover between the $70.00 – $80.00 range in the near term as the global economy firms up. The Naira, which remained fairly stable in the first two quarters of the year, saw more volatility in the third quarter and closed the quarter in the CBN, inter-bank and parallel market windows at N149.85/US$1.00, N154.60/ US$1.00 and N156.00/US$1.00 respectively.
The devaluation is not unconnected with the huge surge in dollar demand, particularly at the tail-end of the third quarter. The CBN Governor, Sanusi Lamido Sanusi, explained that this was as a result of an increase in the volume of petroleum products as well as rice imports, following enhanced credits from the Federal Government’s Petroleum Stabilization Fund (“PSF”) and waivers granted to rice importers. By the end of October, the Naira had appreciated to N148.50/US$1.00, N150.85/US$1.00 and N154.00/ US$1.00 at the CBN, inter-bank and parallel market windows respectively. The CBN has promised to intervene and defend the naira where necessary while it continues to monitor developments in the market, taking measures to eliminate speculative demand and exchange rate volatility.
The NBS recently revised and rebased the Consumer Price Index (CPI) to a November 2009 base period, in a bid to reflect the current consumption structure. Subsequently, inflation rose by 70bps from July to August 2010, and dropped marginally by 10 bps in September, closing at 13.6%. Afrinvest Research is of the opinion that fiscal injections related to election expenses may spur an upward trend in inflation. We however observe that the CBN is actively combating inflation through tighter monetary policies, an example of which is the recent increase in MPR to 6.25% and Standing Deposit Rate (SDR) to 3.25%.
The stock market was up 20.2% by the end of October 2010, after varying degrees of oscillation in the course of the year. This is however an improvement from the 30.5% decline recorded in the corresponding 2009 period.
Stability in Oil Prices…
Crude oil prices remained stable during the quarter with a Q3 2010 average (Bonny light) of $77.84 per barrel, a slight drop from the $80.06 per barrel recorded in Q2 2010. This drop in price has been compensated for by an increase in daily production, from approximately 2.35 million barrels per day in Q2 2010 to about 2.41 million in Q3 2010. Consensus analysts’ forecasts indicate that the outlook on oil prices is stable both in the short and medium term. Investor expenditure on commodities picked up during Q3 2010 after very strong flows during the tail end of 2009. Recognizing this upward trend in oil prices, analysts have reviewed their forecasts up towards the $95.00 mark over the next 12 months. Afrinvest Research expects fundamentals and investor flows to drive oil prices, though the potential increase in production quota/output may lead to a supply glut and check an upward movement in price.
With the return of stability in the country’s leadership, President Jonathan has taken a number of steps, seemingly in the right direction, aimed at boosting economic performance in the third quarter. Top on the list is the unveiling of a very articulate strategy designed to put an end to Nigeria’s chronic power shortages through the privatization of the country’s inefficient power generation and distribution facilities. The recent sanitization of the Nigerian Stock Exchange (NSE) (which should help rebuild investor confidence) and the incorporation of the Asset ManagementCompany of Nigeria (AMCON), are further indications that the president seeks to create the desired enabling environment for economic growth and development.
The exchange rate assumption of N150.00/US$1.00 is proving difficult to sustain given the drastic reduction in the nation’s foreign reserves, the depletion of the windfall oil savings and the fact that inflation has climbed to a high of 13.6%, a sharp contrast to the 11.2% assumed for the budget. We believe that this will pose a threat to exchange rate stability with the exchange rate at N151.50/US$1.00 as at end of October 2010. Cost efficiency ratios are also a major concern, as the quality of government expenditure is suspect, while the level of budget performance remains poor.
Piling Debt Despite Increasing Revenues…
A Sovereign Wealth Fund (SWF) is a state-owned investment fund composed of financial assets, which include money, stocks, bonds, property and other financial instruments. In the Nigerian context, the SWF is expected to replace the current Excess Crude Account (ECA). The ECA was set up as a stabilization fund to bridge budget deficits and fund domestic infrastructure investments. It was however set-up as a political arrangement (and without legal backing) during the Olusegun Obasanjo administration. The bill for the National SWF was submitted to the National Assembly on the 13th of September, to ensure that it has a legal underpinning. About N153.0bn (US$1.0bn) has been set aside as seed capital for its take-off. The fund is to be used for three distinct purposes; savings for the future generation, an economic stabilization fund, and an infrastructure fund for co-investment with other investors.
The Debt Management Office (DMO) released figures in Q3 2010 showing an outstanding domestic debt of N4.2tn (US$28.2bn) from N3.8tn (US$25.3bn) in Q2 2010. FGN bonds accounted for 64.0% of the Q2 2010 domestic debt amount, while Non-treasury Bills (NTBs) and Treasury Bills accounted for 23.9% and 10.4% respectively. Development Stocks and Promissory Notes made up the balance of the debt figure with both responsible for just less than 2.0% of the domestic debt figure. The increase in domestic debt can mainly be attributed to the financing of Federal Government budget deficits and expenditure on capital projects. The DMO also released its issuance calendar for 2010 showing a quarterly increment FGN auctions from N300.0bn in Q2 2010 to N330.0bn in Q3 2010, with a scheduled issuance of N408.8bn in Q4 2010.
The Federal Government also plans to issue a N75.0bn (US$500.0m) Eurobond to fund outstanding infrastructural projects. This is expected to be a five year bond with a fixed coupon rate of 8.625% that will also help finance the budget deficit in the country. This means that the country’s domestic debt figure could climb to over N4.5tn (US$30.0bn) by Q4 2010. In a related development, the international rating agency, Fitch Ratings, downgraded Nigeria’s credit rating to a BB-, and from a stable to a negative outlook. This was based on certain factors, including the near total drawdown of the excess crude account and the continuous fall in foreign reserves.
A depleted excess crude account, amid oil revenues of N7.2tn (US$48.0bn) is a major cause for concern, while the quality of Government expenditure remains worrisome. Apart from the cost incurred from Nigeria’s bureaucratic structure, there is a risk that if a project funded through an FGN Bond is unsuccessfully completed either through mismanagement or poor execution by the contractor, the Federal Government would have to redeem its initial debt on the maturity and re-issue another debt instrument for the same project. This, coupled with the interest paid on any debt facility, means that a project could cost 2-3 times its original price. The Minister of Finance however noted that the steps needed to ensure that Nigeria’s outlook be upgraded to stable are already being implemented. Standard & Poor’s Rating Agency however affirmed Nigeria’s B+/B global scale rating and the NGA+/NGA-1 national scale rating. They also confirmed a stable outlook, reflecting expectations that the country will maintain her strong external and fiscal balance sheet, and improve in budgetary performance.
Our Overall Expectation: 2010
With election related activities on the rise, we fear that progress on the roadmap to reforms in the power sector may stall. The revival of the power sector is a key factor in the continuous growth of industries and businesses in particular and the economy in general. There is therefore an urgent need to follow through on these reforms. We expect that the relative peace in the Niger Delta, as well as stability in crude oil prices, will enhance the country’s foreign exchange revenues. The excess revenue, which will be saved in the SWF, is expected to be used to improve on infrastructure and close budget deficits where necessary.
The CBN stipulated a September 2010 deadline for AMCON to become fully operational. This has however not been the case. We however hope to see some clarity as to the direction of the banking sector when AMCON becomes fully operational. There has also been interest in certain banks by both local and foreign participants, suggesting that mergers and acquisitions are likely to occur. We also believe that the banks will resume lending, although at a gradual pace. Persuasive mechanisms by the CBN may also encourage this to happen as quickly as possible. The resilience of many listed companies in the face of harsh macroeconomic and business conditions has been shown by the relatively decent financial results released. We expect investors to continue to show interest in stocks with positive results and growth potential, as well as a high level of transparency and corporate governance.
The drive by the SEC to ensure transparency and corporate governance in the NSE is expected to boost investors’ confidence and renew interest in equities. The uncertainty around the outcome of the forensic audit on the NSE has somewhat dampened this. We therefore believe that the timely conclusion and release of the audit findings will help restore investor confidence and encourage positive sentiments towards the equities markets. Participants will however remain cautious and eager to lock in any significant short term gains. This suggests that there will be constant profit-taking activities in the market, signifying volatility in trading which may persist till the end of the year.
In our Q1 2010 Market Review, we re-iterated our expectations of significant volatility within the NSE ASI 20,000 to 28,000 points range. Afrinvest Research remains bullish on equities, although we are slightly cautious. We review our forecast to a bear case scenario of a 10.0% -15.0% downside and a bull case of a 5.0% – 10.0% upside from around the 25,000 mark. We also expect lending rates to slowly dip and savings rate to rise as the year comes to an end. </blockquote>
The Central Bank of Nigeria recently released the economic report for the month of July 2009. You can download it below. Here is the summary:
FSDH Securities recently released their report/outlook for the second half of 2009 for the Nigerian economy. Below is an excerpt of their summary of the outlook. You can also download the report below.
The Central Bank of Nigeria recently released the May 2009 Economic Report. The summary and copy of the report are below:
Zenith Bank recently released their macro-economic outlook for the 2nd half of 2008.
CBN recently released the First Quarter Economic report. Excerpts from Business Day Online’s report can be viewed here.
This blog is dedicated to informing users on the latest business and economic news news from the CBN and Nigerian Stock Exchange. Happy reading!